In this article, we will discuss and cover how FHA credit score determines mortgage rate pricing on FHA loans. FHA loans are the most popular loan program in the United States. FHA Credit Score Guidelines are very lenient to qualify for FHA Mortgages. Borrowers with credit scores down to 500 FICO can qualify.

Per the FHA Credit Score Guidelines, HUD, the parent of FHA, requires any borrowers with under 580 FICO need to put in a 10% down payment. Per FHA Credit Score Guidelines, borrowers with at least 580 FICO can qualify for FHA Loans with a 3.5% down payment. In this blog, we will discuss FHA Credit Score determines mortgage rates and the hurdles borrowers face with lower credit scores.

FHA Credit Score Guidelines Versus Mortgage Overlays

What is the minimum credit score needed to qualify for FHA loans? The straight answer is borrowers can qualify for FHA Loans with credit scores down to 500 FICO. However, borrowers with under 580 credit scores need to put a 10% down payment on a home purchase. Borrowers can put in a 3.5% down payment and qualify but need a minimum of a 580 credit score. Unfortunately, the above FHA Credit Score Guidelines are HUD Agency Guidelines. Lenders can have higher credit score requirements than FHA Credit Score Guidelines. These higher lending requirements mandated by individual lenders on top of FHA Guidelines are called lender overlays.

What Credit Score Is Needed For a House in 2022

Let’s take a case scenario. Even though FHA Credit Score Guidelines is 580 FICO for a 3.5% down payment home purchase loan, a lender may require a 620 FICO as part of their overlays. Most banks have FHA Credit Score overlays where the minimum credit score required to qualify for an FHA Loan with them is 640 FICO. Therefore, not all lenders have the same FHA Credit Score Requirements. Gustan Cho Associates is a mortgage company licensed in 48 states with dozens of wholesale mortgage lenders with no lender overlays on government and conventional loans.

Do Mortgage Rates Depend on Credit Scores?

Credit scores play an important part in FHA loans. As mentioned earlier, lower credit scores under 580 FICO will require a higher down payment versus credit scores of over 580. Another role credit scores play in FHA loans is pricing adjustments. Borrowers with under 640 FICO will get pricing adjustment hits. This means higher mortgage rates. Lenders consider lower credit score borrowers as high-risk borrowers. Therefore, lower credit score borrowers will get a pricing hit which means higher mortgage rates. Borrowers with under 600 FICO may even need to pay discount points. Borrowers with 500 FICO will definitely get higher mortgage rates PLUS pay discount points.

What Are The Compensating Factors For an FHA Manual Underwrite?

FHA and VA loans are the only two loan programs that allow manual underwriting. Compensating Factors are very important on manual underwrites with higher debt-to-income ratios. FHA and VA have exactly the same guidelines when it comes to manual underwriting. The main difference between automated underwriting system approval versus manual underwriting is the cap on the debt-to-income ratio on manual underwrites. Borrowers in a current Chapter 13 Bankruptcy Repayment Plan can qualify for both FHA and/or VA loans via manual underwriting with Trustee Approval

Waiting Period Requirements on Chapter 13 Bankruptcy Mortgages

There are no waiting period requirements to qualify for FHA and/or VA loans after the Chapter 13 Bankruptcy discharged date. However, any bankruptcies with less than 2 years of seasoning after the discharge date need to be manually underwritten. DTI is reduced on manual underwriting files. Maximum DTI with no compensating factors on FHA loans is 31% front end and 43% back end. Debt to income ratio caps may be increased on manually underwritten FHA/VA loans with compensating factors.

What Are Compensating Factors in Manual Underwriting Mortgages?

Here is the FHA Compensating Factors Chart:

• Stand DTI Ratio Limit: 31/43 with no compensating facto
• Accept a DTI ratio of 37/47 with at least one of the following factors
• Finance an energy-efficient home.

Accept a DTI ratio of 37/47: Have at least one of the following factor

• Verified and documented cash reserves.
• Minimal increase in housing payment created by the new mortgage, either $100 or 5% increase, whichever is less.
• Significant additional income from such sources as overtime, bonuses, part-time work, or seasonal employment.

Accept a DTI ratio of  40/40: Have at least one of the following factors

• Have no discretionary debt such as auto loan payments, student debt, or required credit card payments.

Accept a DTI ratio of 40/50: Have at least two of the four factors below.

• Verified and documented cash reserves.
• Minimal increase in housing payment created by the new mortgage, either $100 or 5% increase, whichever is less.
• Significant additional income from such sources as overtime, bonuses, part-time work, or seasonal employment.
• A strong residual income, is essentially how much cash is left over each month after basic expenses.

Can I Get an FHA With a 500 Credit Score?

Most lenders have lender overlays. Only a few lenders can do FHA loans with credit scores under 580 FICO. Gustan Cho Associates is a mortgage company licensed in 48 states with no lender overlays on government and conventional loans. We have helped countless borrowers with under 580 FICO qualify for FHA loans. If you are looking for a one-stop mortgage shop lender licensed in 48 states with no overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, on evenings, weekends, and holidays.